When most people hear the term “capital”, they think about money or financial capital. While that may be accurate in most cases, capital can mean different things for business owners, including human capital and social capital.
Just as money doesn’t grow on trees, other types of capital are as scarce as they are valuable. In our first guide for 2021, we are covering the importance of these different capital types and how you can leverage them to expand your business.
What is Capital?
Capital refers to any resource that can be converted for the purpose of business expansion or growth. Because of this broad definition, capital can refer to the money used to pay employees and partners, or it could refer to the actual skills and abilities of the employees themselves. Capital can be tangible or intangible, but it always drives a business to perform more efficiently or effectively.
The different types of capital include:
- Internal Economic Capital – encompasses financial capital like debt and equity, as well as non-financial capital, like brand value.
- Human Capital – encompasses everything to do with the people conducting the work, from their overall engagement to their skills training.
- Cultural and Physical Capital – encompasses the societal merits of each worker (such as a C-level executive’s status in the industry), as well as tangible assets like real estate.
- Relationship Capital – encompasses a company’s relationship with its customers, vendors, partners and other third party organizations.
Let’s explore the definition and purpose of each type.
Internal Economic Capital
The most widely known type of capital is internal economic capital, also known as economic capital. Economic capital refers to the capital a company needs to remain solvent, in other words, a measure of a company’s ability to survive any risks.
Economic capital can be further broken down into financial capital and non-financial capital, although it is most commonly associated with financial capital. Covered under this subtype are other more specific examples of capital, including debt, equity, and specialty capital:
- Debt capital – capital raised by taking out a loan, to be repaid by the company at a future date. Roughly 80% of U.S. small businesses rely on some type of debt capital to fund their ventures.
- Equity capital – capital raised by investors in exchange for shares of common or preferred stock. One of the most favored types of capital because it does not need to be paid back.
- Specialty capital – capital acquired with minimal economic costs. Does not need to be exchanged for interest or share equity. Includes government grants, vendor financing, insurance compensation and other funding with special conditions.
Each subtype of capital has its own advantages and disadvantages, but collectively they represent the most common ways of raising money for a business. Economic capital can be handed out by governments, investors, or other firms.
Non-financial capital refers to assets that cannot be traded on the market but have some form of net value. They can also be converted via securitization into financial assets. A company’s brand or intellectual property cannot be sold outright, but it does hold and generate value. For example, Apple holds a patent for many phone technologies— these create value for the company in that competitors cannot copy their new phone ideas.
Examples of Economic Capital
Recently, several companies received special loans to cover losses incurred as a result of COVID-19. Since some of these loans can be paid back without interest, they also fall under specialty capital.
Before Facebook became a worldwide service, venture capitalist Peter Thiel invested $500,000 in exchange for stock ownership. Microsoft was also an early investor, but sought out preferred stocked, which gave them priority over other shareholders if ever Facebook was sold.
How to Build Internal Economic Capital
Economic capital can be raised in a number of ways. The most direct way is to take out a loan through a local bank, ensuring to pay the interest at a later date. Alternatively, you may consider seeking investor support from your spheres of influence, in exchange for stock ownership of the company. Today, crowdfunding has also become a popular means of generating capital for startups and new product ideas.
Money is not the only indispensable resource that businesses rely on— without people, no one would be present to perform the necessary labor. Everyday people around the world are performing tasks that require specific skill sets and experience. As a result, large companies are willing to invest significant portions of their revenue on hiring and training the best employees.
A key ingredient in today’s human capital management is company culture. According to Deloitte, 94% of executives and 88% of employees believe a distinct workplace culture is important to a business’s success. Gen Z (those born between 1996 and early 2000s) list work-life balance as the number one deciding factor in finding the right company.
How to Build Human Capital
Companies that are committed to harnessing their human capital must focus on employee satisfaction and engagement. Evaluate metrics such as turnover and retention rates as well as reviews left by employees online. Conduct surveys on the nature of the work and relationships with leaders. Provide benefits to employees to maintain a reasonable work-life balance, while creating opportunities for them to move up in the company. Give your team the tools to improve and enhance their experience, and they will reward you with hard work and innovation.
Examples of Human Capital
Salesforce has repeatedly been listed as a “Best Workplace” because of its culture and commitment to employees. The company has even dedicated over $8 million to remove compensation differences by gender, race, and ethnicity.
Seattle Genetics, a cancer-research biotechnology company, offers major benefits like tuition reimbursement, onsite training, and access to job-related conferences and seminars.
Cultural and Physical Capital
Not to be confused with company culture or human capital (although they are closely related), individual cultural capital refers to a person’s social aspects, from the education received to their manner of speech, from the way they dress to the car they drive. In short, it’s how a person is perceived by others in society.
The concept was first introduced in an essay by sociologists Pierre Bourdieu and Jean-Claude Passerson, where they described cultural capital as a person’s knowledge and intellectual skills that helped advance the individual towards a higher class or social status. Today, the concept has expanded to include the influence of information technology (such as access to the Internet), and education.
As one might suspect, physical capital tends to refer to the tangible objects or assets of a business. These objects are usually worth something on the market, or can be converted into cash.
Examples of physical capital include real estate (land or buildings), products, and other man made items such as supplies, vehicles, or machinery. Some have a direct impact on the production of the company offerings, such as factories for producing cars, whereas others have indirect impact, like the printers and fax machines in offices.
How to Build Cultural and Physical Capital
Cultural capital is difficult to build— it is something each individual creates for themselves. However, it can be something screened for within the company culture. Instituting a dress code (or prohibiting one), setting a skills requirement, or creating a benchmark for previous work experience will help narrow the pool of potential employees to the ideal candidate.
Physical capital can be built through more traditional means— by buying available land, stocking up on supplies and equipment, and increasing inventories of a sold product. Keep in mind that physical capital doesn’t necessarily translate into value— it’s always possible to have thousands of units of a useless product.
Examples of Cultural and Physical Capital
Few companies exhibit cultural capital as well as LinkedIn. Almost all of its senior level employees have listed their positions with other prestigious companies, awards and honors received, and recommendations from other professionals.
Some contend that McDonald’s isn’t really a restaurant company, but a real-estate company. In 2015, the company owned $28.4 billion in land and buildings, before depreciation. This is a prime example of physical capital.
Relationship capital, also known as relational capital, encompasses every relationship a company has with other firms, institutions, and individuals. This may include partnerships with suppliers or vendors, customer relations, and connections with similar firms within the industry.
These relationships may be vertical or horizontal, cooperative or competitive. The relationship capital may be internal (within the organization) or external. But the importance of relationship capital cannot be understated— it can make all the difference between a positive and negative reputation, between a productive and stifled work environment.
How does one measure relationship capital? Relationships can’t be quantified, but they can be visualized. Imagine every interaction with a customer or vendor to be like a bank account. The more “deposits” of goodwill that you make, the stronger the account and the stronger the relationship. Although you may encounter an issue in the future, the stronger your relationship, the more likely you will be able to overcome it.
How to Build Relationship Capital
It may seem obvious, but the key to building relationship capital is to focus on building relationships. For internal relationships within the company, culture and training is key. Create an environment of collaboration and teamwork, rewarding each person for hard work while ensuring each individual remains accountable.
With vendor and customer relationships, trust and respect means everything. Build trust over time by keeping to promises and delivering actual value. At times, you may have to sacrifice revenues or admit shortcomings, but as long as your overall relationship remains intact, you can continue to build on it over the years.
Examples of Relationship Capital
Patagonia has such a solid belief in its products that it offers a lifetime guarantee, or what they refer to as an “Ironclad Guarantee”. If a Patagonia item does not meet the customer standards, it can be replaced, repaired, or refunded at the store it was purchased.
Spotify has developed several relationships with other vendors, including Starbucks, Hulu, and Uber. You can find special discounts for Spotify plans or exclusive features within the respective apps thanks to their business ties.
No matter which type of capital you’re talking about, all are important to a business’s success. Business leaders should expand their notion of capital beyond the financial or economic type, to consider the capital resources of laborers and land, as well as metaphysical concepts like culture and relationships.
This coming year, consider how your business can stand to benefit by building human, cultural, physical, and relational capital in addition to economic capital. Finding the time to build a more well-rounded business can pay off dividends in the long run.